U.S.-Pakistan Energy Diplomacy and Geopolitical Risks in the Oil Sector

The recent announcement by U.S. President Donald Trump of a U.S.-Pakistan energy partnership to develop Pakistan's “massive oil reserves” has reignited interest in the region's energy potential. However, a closer examination of historical precedents and geopolitical dynamics reveals a complex landscape of unmet ambitions, structural challenges, and strategic risks. For investors, the question is not merely whether this deal will succeed, but whether it can overcome the systemic issues that have plagued past U.S. and donor-backed energy initiatives in Pakistan.

A History of Unfulfilled Promises

Pakistan's energy sector has long been a magnet for foreign investment, yet it remains a graveyard of abandoned projects. In the 1990s, the World Bank hailed a $1.62 billion privatization deal as the “Deal of the Decade,” only to watch it collapse as the Pakistani government failed to implement pricing reforms. Similarly, the Asian Development Bank (ADB) concluded in 2024 that its 15-year engagement with Pakistan's energy sector had been undermined by inconsistent policy execution and political resistance to subsidy cuts. These failures are not isolated: as of 2024, Pakistan's power sector owed nearly $2 billion in unpaid debts, a direct result of underfunded utilities and consumers who pay below-cost electricity rates.

The U.S. has not been immune to this pattern. Despite decades of diplomatic and financial support, Washington's efforts to stabilize Pakistan's energy market have repeatedly stalled. The Trump administration's latest pledge—announced on Truth Social with the vague assurance that a U.S. oil company will “lead this partnership”—echoes earlier promises. Yet no American firm has publicly committed to the project, and Pakistan's regulatory environment remains a minefield of bureaucratic delays and security risks.

Geopolitical Leverage vs. Economic Realities

Trump's framing of the deal as a tool to pressure India—by hinting that Pakistan might one day sell oil to its regional rival—highlights the geopolitical stakes. The U.S. has imposed a 50% tariff on Indian goods over its continued imports of Russian oil, while reducing Pakistan's tariff to 19%. This asymmetry is designed to incentivize Pakistan to align with U.S. energy policies and counterbalance China's influence in the region. However, the practicality of such leverage is questionable.

Pakistan's energy infrastructure is ill-equipped to handle large-scale exports. The country imports 85% of its crude oil and spends $11.3 billion annually on oil imports, yet its domestic refining capacity is constrained by aging facilities and inadequate storage. Even if U.S. companies were to invest in exploration, the timeline for commercial production would likely stretch beyond the Trump administration's term. For investors, this raises a critical question: Is the deal a genuine economic opportunity, or a symbolic gesture to bolster U.S. credibility in South Asia?

Risks and Opportunities for Investors

The U.S.-Pakistan energy agreement carries both risks and potential rewards. On the risk side, historical data shows that foreign firms often exit Pakistan's oil sector due to regulatory uncertainty and security concerns. For example, major international oil companies have previously withdrawn from Pakistan's offshore blocks after years of stalled negotiations. Additionally, the lack of transparency in the selection process for the lead U.S. oil company—Trump's announcement conspicuously omitted any names—suggests a lack of due diligence.

On the opportunity side, Pakistan's energy deficit creates a compelling long-term case for investment. The country's energy demand is projected to grow by 7% annually, driven by industrialization and population growth. If the U.S. can facilitate access to cheaper, diversified oil sources—such as the recent import of U.S. crude by Cnergyico—Pakistan could reduce its reliance on volatile Middle Eastern suppliers. For U.S. firms, this represents a chance to tap into a market with untapped potential, provided they navigate the political and operational challenges.

Strategic Recommendations

For investors considering exposure to this sector, a cautious, diversified approach is advisable. Here are three key strategies:

1. Focus on Infrastructure Over Exploration: Given the uncertainty around oil production timelines, investments in energy infrastructure—such as refining capacity or renewable energy projects—may offer more immediate returns. Pakistan's recent $7 billion IMF program has stabilized its economy, creating a window for infrastructure investment.

2. Monitor Geopolitical Signals: The U.S. is using energy diplomacy to reshape regional alliances. Investors should track developments in U.S.-India trade tensions and Pakistan's alignment with the U.S.-backed India-Middle East-Europe Economic Corridor (IMEC). A shift in these dynamics could alter the value proposition for energy projects.

3. Assess Political Will: The success of the U.S.-Pakistan deal hinges on Pakistan's ability to implement pricing reforms and attract private capital. Investors should closely follow statements from Pakistani officials, particularly Finance Minister Muhammad Aurangzeb, who has emphasized the need for “structural reforms.”

Conclusion

Trump's announcement of a U.S.-Pakistan energy partnership is a bold but historically fraught endeavor. While the geopolitical implications are clear—using energy as a tool to counter Russian and Chinese influence—the economic realities are less certain. For investors, the key lies in balancing optimism with pragmatism. The deal may yet prove to be a turning point, but only if it addresses the structural issues that have derailed past efforts. Until then, the oil fields of Pakistan remain a promise, not a certainty.